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US Fed chairman's speech boosts Wall Street

Posted on Sunday, December 02, 2018 by Mercedes Poole

Traders work on the floor of the New York Stock Exchange in New York on Nov. 28 2018

Powell "gave the market, and presumably President Trump, exactly what he wanted, which was an admission that the previously proposed path of future rate hikes was probably too aggressive and opening to slowing the rate of hikes", said Oliver Pursche, vice chairman and chief market strategist at Bruderman Asset Management in NY.

A few participants also expressed reservations about the timing of the next rate hike, suggesting that the benchmark rate - which determines the cost of borrowing on credit cards, mortgages and other loans - may now "be near its neutral level" and "further increases" could slow down the economy's expansion.

The chairman also suggested that interest rates appear to be just below the level the Fed calls "neutral", where they are thought to neither stimulate growth nor impede it.

A mistake in communication may have made investors think the Federal Reserve is adopting a looser monetary policy, following a speech by chair Jerome Powell on November 28.

The Fed has raised its benchmark short-term rate, now in a range of 2 per cent to 2.25 per cent, three times this year and is expected to do so again next month. Stocks swooned on those remarks as investors bet the US central bank would need more rate hikes to prevent the economy from overheating. But he said the Fed's gradual increases balanced the risks between raising too much and not enough. Why should he? The data for the United States economy remains strong.

Minutes of the USA central bank's November 7-8 meeting showed "almost all participants" agreed that another rate hike would likely be necessary "fairly soon". The Fed altered its stance on rates to "just below the neutral rate" from its earlier articulated position of "a long way to neutral", lowering the chances of quick increases in the cost of funds.

While the Fed is expected to raise rates by a quarter point at its meeting on Dec 19, it has forecast to have three more hikes next year.

"If you look down the road, you see challenges ahead, and they're challenges that are typical in a cycle", said Powell speaking earlier this month at the Federal Reserve Bank of Dallas. The FOMC is likely to link future interest rate decisions more closely to incoming data and then decide on a case-by-case basis.

Tom Porcelli of RBC Capital Markets said investors were wrong to interpret Powell's words as "dovish". That would bring it to about the bottom of the September range of neutral-rate estimates from 15 governors and regional Fed presidents, who gave figures from 2.5 per cent to 3.5 per cent.

"Over the past year, firms with high leverage and interest burdens have been increasing their debt loads the most", Mr. Powell said.

The Fed takes equally seriously the risks of hiking too quickly and shortening the economic expansion, and on the other hand of hiking too slowly and prompting higher inflation or financial instability, Powell said.

In November, Fed policymakers agreed to hold rates steady, leaving the benchmark rate unchanged in a range of 2% and 2.5%.

"There is a great deal to like about this outlook", said Powell on Wednesday. Some analysts are now saying the Fed may decide to raise rates only once or twice in 2019.

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